Understanding Insurance: Risk Factors in Your Life

Roulette Wheel

How risky is your life?

You may not be a skydiver, a super spy or some other kind of daredevil, but you still lead a risky life. We all do. Even the most boring person is at risk of having health problems, a car wreck, home repairs or natural disasters. Those risks bring big financial implications to your life. If you understand and manage your risk factors well, though, you can protect yourself and save a lot of money on insurance.

In this series, Understanding Insurance, we’re teaching some of the fundamental principles that make the insurance industry work, and teaching you how to make the most of insurance without pay too much. Last time, we discussed the principle that when you buy insurance, you’re removing some of the risk from your life and putting it on the insurance company’s shoulders. Today, we’re going to take that concept a step further, and examine how some of the specific risk factors in your life can affect your insurance profile.

When you buy insurance, the company that you do business with is taking a large portion of the risk in one area of your life (your driving, your health, your home, etc.). Of course, it costs money to take on risk, and the more risk factors you have in your life — the riskier your life is — the more the company is going to charge you to take that risk off your hands. A well known example of this principle is smoking: Smokers are much more likely to have serious health problems throughout the course of their lives than non-smokers, and they’re more likely to die prematurely of heart or pulmonary disease. Because of this, health and life insurance companies charge much more to insure smokers than they do non-smokers, because they know that the likelihood of making a payout on those policies is much greater.

It may seem difficult to gauge how risky someones life is, but insurance companies have it down to a science — literally. These corporations employ armies of math whizzes known as actuaries, who constantly analyze mountains of data to find trends among different groups of people. The actuaries use this data to determine what factors in a person’s life increase or decrease their risk, and to figure out what the insurance companies should charge for taking that risk on. And while no actuary can predict the future and tell you exactly what disaster will befall your individual life, they are remarkably accurate when it comes to predicting the frequency of certain ailments and issues across large cross-sections of the population.

Armed with this actuarial information, insurance companies ask for detailed information on your life before writing you a policy, and determine the price of your coverage based on a number of risk factors in your life. While the items they look for will vary somewhat based on the kind of insurance that you’re buying, some common risk factors come up in almost every kind of insurance. Understanding your risks and managing them well can help you avoid paying too much for insurance. Here are a few to take note of:

1) Your age. Age is one of the most important factors in insurance. Depending on the type of insurance you’re buying, your age can work to your benefit or to your detriment. Take life insurance for example: The younger you are, the less likely it is that you’re going to die in the next 30 years. So a 30-year life insurance policy for a 21 year old costs next to nothing — only a few dollars per month. For a 70 year old, though, that policy is going to be very expensive. In auto insurance, though, youth works against you. Teenage drivers are far, far more likely to have car wrecks then experienced drivers in their 40s or 50s. As a result, a teenager is the most expensive driver on the plant to insure, and the rates don’t really normalize until you reach about 25 years old.

2) Your sex. It may not be politically correct to say this, but biologically and statistically it’s true: There are major differences between men and women. Young men, for example, are statistically more likely to take risks than young women are, and thus they statistically have more car wrecks than their female counterparts. That means that teenage boys pay a lot more for car insurance than teenage girls. The trend reverses later in later in life when you start buying health insurance: Because women in their 20s and 30s are very likely to have children (and incur significant medical costs in giving birth), women of childbearing age pay two or three times as much as men for similar health insurance.

3) Your health. It goes without saying that unhealthy people spend more time in the hospital than healthy people do, and they’re more likely to die prematurely. As a result, any risk factor in your life that threatens your health also raises your insurance rates. Smoking, drinking heavily, and excess weight are considered risk factors by insurance companies, and they dramatically raise the price of buying health and life insurance. You may even see increases if you have a family history of certain hereditary diseases.

4) Your property. The more expensive your property is, the more it’s going to cost you to insure in — that much makes sense. But some surprising features of your property can make your insurance more expensive, regardless of the property’s value. It’s more expensive to insure a sports car than a sedan, because insurance companies think that sports car drivers are more likely to speed and to have wrecks. It can even be more expensive to insure a bright red car than a boring beige one. The same thing is true in property insurance — if your property is located in Kansas or Oklahoma where tornadoes are prevalent, it will cost more to insure the structure than it would to insure the same house in Minnesota.

5) Your habits. In addition to all of the built-in risk factors that insurance companies monitor, they also look at the habits you have that might indicate how risky your life is. If you have a record of speeding or racking up traffic tickets, you can expect to pay a lot for auto insurance. Students with good grades get discounts on their auto policies. Homeowners insurance companies have been known to raise people’s rates when they simply inquire about making claims on their policies. And many insurance companies check your credit score before they insure you — the figure that the better your credit is, the more likely you are to be a responsible person, and the less likely you are to have a costly mishap in life.

As you can see, some of these risk factors are hard-wired into your life; there’s nothing you can do about your age or sex. But others, like your property, your health and your habits, are largely under your control. Living a healthy, responsible and conservative life can keep you from overpaying on insurance.


Photo by Hakan Dahlstrom. Used under Creative Commons License.


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